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Yes Bank: Bond write-downs hurt profits - Views on News from Equitymaster
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Yes Bank: Bond write-downs hurt profits
Oct 23, 2013

Yes Bank declared its results for the second quarter and first half of financial year 2013-14 (1HFY14).The bank has reported 34% YoY and 30% YoY growth in net interest income and net profits respectively in 1HFY14. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 34% YoY in 1HFY14 on the back of 14% YoY growth in advances.
  • Other income grows by 57% YoY in 1HFY14 due to robust growth in fee income.
  • Net interest margin remains stable at 2.9%, due to rise in proportion of CASA deposits.
  • Bottomline grows 30% YoY in 1HFY14 despite higher provisioning.
  • Capital adequacy ratio (CAR) comfortable at 15.6% (Tier 1- 9.5%), gross NPA at 0.28% of advances at the end of September 2013.


(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Interest income 19,863 25,013 25.9% 38,727 48,992 26.5%
Interest Expense 14,622 18,292 25.1% 28,764 35,679 24.0%
Net Interest Income 5,241 6,721 28.2% 9,963 13,313 33.6%
Net interest margin (%)       2.9% 2.9%  
Other Income 2,767 4,462 61.3% 5,649 8,881 57.2%
Other Expense 3,162 4,053 28.2% 6,169 8,265 34.0%
Provisions and contingencies  317 1,791 465.0%    617 2,761 347.5%
Profit before tax 4,529 5,339 17.9% 8,826 11,168 26.5%
Tax 1,469 1,626 10.7% 2,864 3,447 20.4%
Profit after tax/ (loss) 3,060 3,713 21.3% 5,962 7,721 29.5%
Net profit margin (%) 15.4% 14.8%   15.4% 15.8%  
No. of shares (m)         359.7  
Book value per share (Rs)*         173.0  
P/BV (x)         2.2  
*Book value as on 30th September 2013

What has driven performance in 2QFY14?
  • In what was expected to be a difficult quarter for Yes Bank given the high exposure to treasury assets, Yes Bank clocked a respectable 21.3% YoY growth in profits. The bank reported a very slow 14% growth in advances for 1HFY14, backed by 16% YoY growth in corporate loan book. This was against the backdrop of lower loan growth expectation due to muted GDP growth rates. Having said that, at 15.6% capital adequacy ratio (CAR), Yes Bank is one of the best capitalized in the sector. Also, it has one of the highest proportions of Tier II capital. The deposit growth however was much higher at 29% YoY. What is worrisome is that wholesale deposits accounted for 31% of total deposits and are priced at higher rates The 52% YoY growth in CASA came on account of the higher interest offered by the bank on savings accounts. This catapulted the CASA deposits to 20.2% of total loan book.. While NIMs are currently stable at 2.9% at the end of September 2013, they may come under pressure with upward movement in interest rates.

    Slowdown in advances
    (Rs m) 1HFY13 % of total 1HFY14 % of total Change
    Advances 420,193   477,172   13.6%
    Retail 84,039 20.0% 85,891 18.0% 2.2%
    Corporate 336,154 80.0% 391,281 82.0% 16.4%
    Deposits 522,908   675,751   29.2%
    CASA 90,463 17.3% 137,853 20.4% 52.4%
    Term deposits 432,445 82.7% 537,898 79.6% 24.4%
    C/D ratio 80.4%   70.6%    

  • The proportion of Yes Bank's non-funded income to total income increased to 40% in 1HFY14 from 38% in 1HFY13. This can be largely attributed to higher fee income. The bank incurred one-time depreciation of Rs 1.1 bn on its bond portfolio in 2QFY14.

  • Due to addition to franchise as well as employee base, Yes Bank's cost to income ratio remained high at 37% in 1HFY14. This was nevertheless lower than 39.5% in 1HFY13.The bank's total headcount stood at 7,998 in September 2013 (up 27% YoY). The bank expects its operating costs to increase at an annual average rate of around 40% over the next 2 to 3 years given the branch expansion targets.

  • In relative terms, Yes Bank had a slower slippage in asset quality while the gross NPA stood at 0.28% of advances at the end of September 2013. However, the management did not rule out possibility of slippages from the restructured loan book (0.3% of gross advances). Also the rise is provision costs are a cause for concern. Yes Bank also had provision coverage ratio of 85.3%.

  • The bank's annualized return on equity and return on assets stood at 23.1% and 1.5% at the end of 1HFY14, with the averages over the past 4 years being 20% and 1.5% respectively.
What to expect?
At the current price of Rs 374, the stock of Yes Bank is trading at 1.8 times our estimated FY15 adjusted book value. Although Yes Bank's performance has been in line with our estimates, we do see some margin and asset quality pressures in the medium term. The conflict on the bank's board, though not impacting fundamentals, can hurt long term prospects. Further, we would prefer to be cautious about its provisioning policy. The stock has gone up by 66% since we recommend buy on it in August 2013. We recommend investors to book 50% profits and hold on to the rest. A gentle reminder that no stock should comprise more than 5% of your overall stock portfolio.

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